Cut Back, But Don’t Eliminate Bonds from Your Portfolio

The allocation of capital across asset classes is perhaps one of the most difficult aspects of constructing a portfolio, now more than ever.

With interest rates on the rise, and little indication that this rising rate environment is likely to change any time soon, sentiment among many investors is that putting too large of a percentage of one’s assets into bonds in today’s economic climate is suicide.

While it is true that fundamental indicators continue to show that equities will outperform bonds for some time, investors looking to rebalance a portfolio to a 100% equities structure may be increasing risk to unacceptable levels without acknowledging the upside bonds provide to portfolios in the latter stages of a bull market.

Bonds remain one of the quintessential tools investors have for diversification and risk management; while bonds typically take a hit in rising interest rate environments, or during bull markets when money continues to be funneled into equities and away from fixed income securities, bonds should remain a meaningful component of investor portfolios in the years to come for a number of reasons.

While the need for fixed income varies for investors depending on a number of factors, having access to higher yield securities is one way to ensure dependable returns over time.

Capital appreciation is important, and while bonds may depreciate in face value over time, during periods of low inflation, deflation, or recessionary environments, bonds tend to substantially outperform equities, providing a buffer to investors in difficult times, a fact which cannot be understated today.